Paternalism

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Paternalism and public policy

Problems associated with
bounded rationality
and bounded
self-control have led many behavioural economists to conclude that
the state’s policy makers should try to put in place policies which help
individuals make more rational choices.

The use of
rules of thumb and the tendency
for decisions which maintain the status quo, has led many behavioural
economists to propose ways to reduce these reasoning shortcuts to help
individuals improve the effectiveness of their individual decision
making. In their ground-breaking work, Nudge, Richard Thaler
and Cass Sunstein1 suggest that even small
changes to individual’s ‘choice architecture’ – the context in which
they make the choice - can help individuals make better choices.
'Nudges' might include placing healthier food at eye-level in supermarkets,
or setting default decisions in favour of 'good' behaviour rather than
'bad' behaviour.

Small nudges

Behavioural economists argue that small nudges can point people
towards making more rational decisions. This has often been described as
‘soft paternalism’, ‘new paternalism’ or ‘liberal paternalism’. In
other words, a team of dispassionate policy-makers who (we assume) have
peoples’ interests at heart, and who understand the underlying ideas of
behavioural economics, may be able to ‘steer’ individuals towards making
more optimal decisions. This is because they can solve some of the
problems associated with bounded rationality – namely, they have more
time on their hands to think about ‘good’ choices, have ‘more
information’ to base their choice on, and do not rely on simple
heuristics.

For example, more beneficial ‘rules’ can be created by policy-makers,
which can counteract the negative effect of heuristics, such as rule of
thumb decisions. For example, if the rule of thumb for potential savers
is ‘I’ll start saving next year’, then an ‘opt-out’ save-as-you-earn policy is better than an ‘opt-in’ one. So, employers could be
forced to transfer some income to a savings scheme for the employee,
which would operate unless the individual actively opted out. This kind
of strategy would seem to uphold the individual’s right to choose, while
creating a better outcome than the individual would have gained if
left to their own default ‘no-save’ decision.

Mandated choice

Mandated choice forces adults to make a decision about something,
such as saving for retirement, or donating organs. A mandated choice is
‘stronger’ than a ‘nudge’. While individuals may be free to state which
option they choose, they are not free to ignore the question, or
avoiding answering it. Governments and authorities have been quick to
adopt some of the ideas proposed by the behavioural economists.

For example, in the USA, following the sub-prime housing crash,
individuals can be forced to accept
financial counselling
and cannot opt out. Similarly, in 2013, New York Mayor Michael Bloomberg took away the
choice of consuming soft drinks larger than 16 ounces.

Mandated delays

Legislators can impose time gaps between the initial enquiry
regarding a complex product which might contain hidden risks, such as a
mortgage, and the decision to go ahead with the transaction. Mandated
delays are also called deliberation tools as they force
individuals to think more deeply about the impact of a decision, and
hence reveal their deep (rather than superficial) preferences – such as
for healthy food rather than for junk food. This could take the form of
an imposed delay before the purchase, or a cooling off period after the
purchase.

Given
what behavioural economists have suggested about status quo bias and
inertia, cooling-off periods are more likely to be the favour of the
seller as once the contract has been signed, the probability of a change
of mind will fall.

Defaults

Creating a default which favours ‘good’ over ‘bad’ choices enables policy makers
to manipulate decisions to help individuals make
more rational choices. Defaults are said to work best (Sunstein, 2013)
when the individual has no particular preference. For example, if
individuals have no particular preference about whether they have drinks
sweetened with natural, calorific, sugars or artificial sweeteners, then
the default option could be switched to the no-sugar option. Similarly,
a café could be forced to switch its default option for milk to ‘skinny’
rather than, as is usually the case, the ‘full fat’ option.

Behavioural design

Since the publication of Nudge, governments around the
world have sought ways to implement the ideas behind behavioural
economics. In the US, the appointment in 2009 of one of behavioural economics
founding fathers, Cass Sunstein, as head of the White House
Office of
Information and Regulatory Affairs (the so-called Regulation Czar)
is evidence of the popularity of employing the techniques of
behavioural economics in public policy.

New York Mayor
Bloomberg has been an active advocate of state involvement into
behavioural design programmes in a whole range of areas, from fitness to
road safety.

The UK’s Nudge Unit

The UK’s nudge unit (the Cabinet Office's
Behavioural Insights
Team) was set up in 2010 to test and implement public policy based
on the theories of behavioural economics – especially the idea of
behaviour nudging. Using the principles of experimentation, several
projects were instigated to help improve the performance of government
departments and schemes, including one experiment with job centres.
Based on their trials the nudge unit recommended a change to how job
seekers were dealt with (i.e. a change to the choice architecture),
including meeting an advisor on their first visit, and creating a plan
for their next two week period (which would stimulate System 2 thinking
and reduce various biases shaping jobseekers views on the likelihood of
obtaining work). The effect was that, after around 3 months the group
that were subject to the new system were some 20% less likely to be
claiming benefits compared with the control group.

Of course, critics argue that behavioural economics has been
somewhat 'over-hyped' and should not be seen as providing a replacement
for more traditional policy interventions, including taxes and
subsidies.